The headline news of reducing transport fares certainly bring about positive news to consumers. Unfortunately not so for investors. On the other hand, if the population were to increase, it would also translate to higher revenue too.
For now, there will be a short-term drop in Comfort prices due to this morning's headlines.
Comfort DelGro (CD SP) BUY/S$2.67/Target: S$3.11
Fares To Fall By 4.2%
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Reduction of fares by 4.2%. Last night, LTA announced that bus and train commuters will enjoy an overall fare reduction of 4.2% from Dec 30 due to lower energy price, which translates to a fare reduction of up to 27 S cents per trip for commuters. A further 1.5% reduction (allowable fare reduction of 5.7%) will be carried forward to the next review exercise as LTA stated a prudent approach is necessary to ensure longer term sustainability of the public transport system.
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Simplified fare structure. As part of the reduction, fare structure will be simplified, where fares for fully underground rail lines such as NEL, CCL and DTL (currently cost 5-25 cents more for adult commuters) to be lowered to the same as those of above-ground lines, such as NEL and EWL. Additionally, PTC will now calculate transport fares based on distance travelled, where rail fares currently are determined by distance of the fastest travel path, which includes walking and waiting time.
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Impact on CD rail business. Impact on bus segment for CD should be limited, given that bus revenue is retained by LTA under the new Bus Contracting Model. However, we expect impact to come on the rail side for CD, where LTA estimates that a 4.2% reduction in fares will mean a cut in revenue for SBST by S$8.9m. Based on LTA's estimates, our sensitivity analysis shows that it could translate to an overall net profit downside of up to 2% for CD in FY17F.
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Valuation. We maintained our BUY rating for CD with PE-based target price of S$3.11 for now, pending results on 11 November 2016.
